Coach Stock Soars as Investors Ignore Red Flags

Investors pushed Coach (NYSE: COH) stock up by more than 9% on Tuesday, after the luxury goods retailer beat analysts' estimates for its third quarter. Coach reported earnings of $0.84 a share for the period, whereas analysts were expecting earnings per share of $0.80 at best. To top off the impressive quarter, Coach rewarded stockholders with a dividend hike of $0.15 annually. This means Coach stock will now pay an annual dividend of $1.35 per share.

However, the good news masked red flags that would otherwise be cause for concern at the company.

The timing couldn't be worseWhile most investors focused on the upbeat earnings announcement, little attention was given to the fact that Reed Krakoff, the company's president and executive creative director, will be leaving the company when his contract expires next June. The creative director is the lifeblood of a brand. Moreover, during his 16-year career at Coach, Krakoff is credited with transforming the company from a leather goods seller into a global luxury brand.

The timing of Krakoff's departure is equally troubling. The news comes as the company attempts to rebrand itself as a so-called "lifestyle" brand, in order to fend off increased competition from Michael Kors (NYSE: KORS) . As you can see from the chart below, the namesake fashion company has markedly outperformed Coach stock year to date.

Going forward, Coach's retail strategy of becoming a lifestyle brand could be even harder to achieve without the vision of longtime creative director Krakoff. The famous fashion designer Michael Kors, on the other hand, is still heavily involved in the Kors brand.

In addition to the competitive setbacks Krakoff's resignation may cause, the news comes just months after Coach's longtime CEO Lew Frankfort announced his own plans to leave the company next year. Ouch.

These impending departures by top executives could cause investors to dump Coach stock down the road. For this reason, investors may want to wait on the sidelines as the stock works through this transitional period. In the meantime, investors may want to take a closer look at rival stock Michael Kors.

Michael Kors is one of today's hottest high-end fashion brands, and that's translated into one of the best-performing stocks in retail -- since its debut on the market in late 2011, the share price has more than doubled. But with all that growth, has the stock finally become too expensive, or is there still room left to run? The Motley Fool's premium report on Michael Kors gives investors all the information they need to make the right decision. We cover the key must-watch areas, opportunities, and threats to the company that investors need to know. To claim your copy, simply click here now for instant access.

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You, dear author, may view the departure as a red flag; others are viewing it as a green flag.

Many fashionistas have been calling for Coach to make some changes with its designer team for a while now, the strong performance of michael kors, tory burch, and marc jacobs. A quick google trends search comparing these companies shows the flat popularity with Coach and the growing popularity of the latter 3 companies. But your line of thinking is that Krakoff should stay on board. Interesting.

Others have noted that Coach may have a desire to seek out a buyer to go private. (Notice how management didn't say anything about share buybacks this quarter? When was the last time Coach didn't buyback shares?) Perhaps the company is planning a larger change of direction, and is simply allowing Krakoff to pursue other opportunities.

Finally, you mention the untimeliness of Krakoff's departure. He simply isn't renewing his contract upon expiration, which doesn't occur for another year.